What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2023-02-14 · 350 added, 344 removed, 15 unchanged (98% of the section changed)

Discussion and Analysis of Financial Condition and Results of Operations.

following discussion and analysis of our financial condition and results of operations should be read in conjunction with our

unaudited Condensed Financial Statements and related notes thereto included in Part I, Item 1 of this Quarterly Report on Form

10-Q, and our audited financial statements and related notes thereto included in Part II, Item 8 of our Annual Report on Form

10-K for the fiscal year ended June 30, 2022 (“fiscal 2022”).

(“we,” “our,” “us,” “Electromed” or the “Company”) develops and

provides innovative airway clearance products applying High Frequency Chest Wall Oscillation (“HFCWO”) technologies

in pulmonary care for patients of all ages.

manufacture, market and sell products that provide HFCWO, including the SmartVest® Airway Clearance System (“SmartVest

System”) that includes our SmartVest SQL® and previous generation SV2100, and related products, to patients with compromised

pulmonary function.

The SmartVest SQL is smaller, quieter and lighter than our previous product, with enhanced programmability

and ease of use.

Our products are sold in both the home health care market and the institutional market for use by patients in

hospitals, which we refer to as “institutional sales.” The SmartVest SQL has been sold in the domestic home care market

In 2015, we launched the SmartVest SQL into institutional and certain international markets.

In June 2017, we announced

the launch of the SmartVest SQL with SmartVest Connect™ wireless technology, which allows data connection between physicians

and patients to track therapy performance and collaborate in treatment decisions.

SmartVest Connect is currently available to

pediatric and cystic fibrosis patients and was made available to certain targeted adult pulmonary clinics starting in November

Since 2000, we have marketed the SmartVest System and its predecessor products to patients suffering from cystic fibrosis,

bronchiectasis and repeated episodes of pneumonia.

Additionally, we offer our products to a patient population that includes neuromuscular

disorders such as cerebral palsy, muscular dystrophies, amyotrophic lateral sclerosis (“ALS”), the combination of

emphysema and chronic bronchitis commonly known as chronic obstructive pulmonary disease (“COPD”), and patients with

post-surgical complications or who are ventilator dependent or have other conditions involving excess secretion and impaired mucus

December 2022, we received 510(k) clearance of our newest generation SmartVest® Clearway® Airway Clearance System

(“Clearway”) from the U.S.

Food and Drug Administration and began a limited market release, with the expectation of

a full product launch this year in our third fiscal quarter which ends March 31, 2023.

SmartVest System is often eligible for reimbursement from major private insurance providers, health maintenance organizations

(“HMOs”), state Medicaid systems, and the federal Medicare system, which we believe is an important consideration

for patients considering an HFCWO course of therapy.

For domestic sales, the SmartVest System may be reimbursed under the Medicare-assigned

billing code (E0483) for HFCWO devices if the patient has cystic fibrosis, bronchiectasis (including chronic bronchitis or COPD

that has resulted in a diagnosis of bronchiectasis), or any one of certain enumerated neuromuscular diseases, and can demonstrate

that another less expensive physical or mechanical treatment did not adequately mobilize retained secretions.

Private payers consider

a variety of sources, including Medicare, as guidelines in setting their coverage policies and payment amounts.

Accounting Estimates

a description of our critical accounting policies, estimates and assumptions used in the preparation of our financial statements,

including the unaudited Condensed Financial Statements in this Quarterly Report on Form 10-Q, see Note 1 to our unaudited Condensed

Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Part II, Item 7, and Note 1 to our audited

financial statements included in Part II, Item 8, of our Annual Report on Form 10-K for fiscal 2022.

of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating

financial statements.

Such judgments are subject to an inherent degree of uncertainty and are based upon our historical experience,

known trends in our industry, terms of existing contracts, other information from outside sources, as appropriate and other factors.

Therefore, management discusses the development, selection and disclosures with the audit committee.

Among other factors, these

judgments are based upon our historical experience, known trends in our industry, terms of existing contracts and other information

from outside sources, as appropriate.

We believe the critical accounting policies that require the most significant estimates,

assumptions and judgments in the preparation of our financial statements, including the unaudited Condensed Financial Statements

contained in this Quarterly Report on Form 10-Q, include:

revenue recognition and the estimation of variable consideration, inventory

valuation, share-based compensation and warranty reserve.

of COVID-19 on Our Business and Operations

March 2020, the World Health Organization designated COVID-19 as a global pandemic, and the U.S.

Department of Health and Human

Services designated COVID-19 as a public health emergency.

The impact of the COVID-19 pandemic on our business remains uncertain,

and its effects on our operational and financial performance will depend in part on future developments, which cannot be reasonably

estimated at this time.

Such future developments include, but are not limited to, the duration, scope and severity of the COVID-19

pandemic in geographic areas in which we operate or in which our patients live, actions taken to contain or mitigate its impact,

the impact on governmental healthcare programs and budgets, the development and distribution of treatments or vaccines, and the

resumption of widespread economic activity.

Due to the inherent uncertainty of the unprecedented and evolving situation, we are

unable to predict with confidence the likely impact of the COVID-19 pandemic on our future operations.

believe that the impact of the COVID-19 pandemic on our home care and institutional business will likely continue through the

remainder of fiscal 2023.

Our home care and institutional revenue for the three months ended December 31, 2022 increased as compared

to the three months ended December 31, 2021;

however, if COVID-19 infection rates increase and federal, state and local restrictions

on commerce, stay-at-home orders or other restrictions on businesses are reinstated, we believe that such measures could have

a material adverse effect on our business.

response to the COVID-19 pandemic and the U.S.

federal government’s declaration of a public health emergency, the Centers

for Medicare & Medicaid Services (“CMS”) implemented a number of temporary rule changes and waivers to allow prescribers

to best treat patients during the period of the public health emergency.

These waivers became effective on March 1, 2020.

indications and documentation typically required will not be enforced for respiratory-related products, including the SmartVest

System (solely with respect to Medicare patients).

The minimum documentation now requires a valid order and documentation of a

respiratory-related diagnosis.

Face-to-face and in-person requirements for respiratory devices are being waived while the waiver

The CMS waiver was recently extended in conjunction with the extension of the federal public health emergency for

an additional 90-day period beginning January 11, 2023.

January 30, 2023, the Biden administration announced that the COVID-19 national and public health emergency declarations will

end on May 11, 2023 (the “PHE End Date”), one month after the current PHE was previously set to expire, or April 11,

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion

and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Condensed Financial

Statements and related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our audited financial

statements and related notes thereto included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended June

30, 2022 (“fiscal 2022”).

Electromed, Inc.

“our,” “us,” “Electromed” or the “Company”) develops and provides innovative airway

clearance products applying High Frequency Chest Wall Oscillation (“HFCWO”) technologies in pulmonary care for patients

We manufacture, market and sell products that provide HFCWO, including

the SmartVest® Airway Clearance System (“SmartVest System”) that includes our newest generation SmartVest Clearway®

Airway Clearance System (“Clearway”), previous generations SmartVest SQL® and SV2100, and related products, to patients

with compromised pulmonary function.

The SmartVest Clearway, which received 510(k) clearance from the U.S.

Food and Drug Administration

in December 2022, offers a state-of-the-art patient experience with a simple touch screen user interface, remote monitoring of data, and

is the lightest HFCWO generator on the market.

Clearway also includes SmartVest Connect™ wireless technology, which allows data

connection between physicians and patients to track therapy performance and collaborate in treatment decisions.

Our products are sold in both the

home health care market and the institutional market for use by patients in hospitals, which we refer to as “institutional sales.”

Since 2000, we have marketed the SmartVest System and its predecessor products to patients suffering from cystic fibrosis, bronchiectasis

and repeated episodes of pneumonia.

Additionally, we offer our products to a patient population that includes neuromuscular disorders

such as cerebral palsy, muscular dystrophies, amyotrophic lateral sclerosis (“ALS”), the combination of emphysema and chronic

bronchitis commonly known as chronic obstructive pulmonary disease (“COPD”), and patients with post-surgical complications

or who are ventilator dependent or have other conditions involving excess secretion and impaired mucus transport.

The SmartVest System is often eligible

for reimbursement from major private insurance providers, health maintenance organizations (“HMOs”), state Medicaid systems,

and the federal Medicare system, which we believe is an important consideration for patients considering an HFCWO course of therapy.

domestic sales, the SmartVest System may be reimbursed under the Medicare-assigned billing code (E0483) for HFCWO devices if the patient

has cystic fibrosis, bronchiectasis (including chronic bronchitis or COPD that has resulted in a diagnosis of bronchiectasis), or any

one of certain enumerated neuromuscular diseases, and can demonstrate that another less expensive physical or mechanical treatment did

not adequately mobilize retained secretions.

Private payers consider a variety of sources, including Medicare, as guidelines in setting

their coverage policies and payment amounts.

Critical Accounting Estimates

For a description of our

critical accounting policies, estimates and assumptions used in the preparation of our financial statements, including the unaudited

Condensed Financial Statements in this Quarterly Report on Form 10-Q, see Note 1 to our unaudited Condensed Financial Statements

included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Part II, Item 7, and Note 1 to our audited financial statements

included in Part II, Item 8, of our Annual Report on Form 10-K for fiscal 2022.

Some of our accounting

policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial statements.

Such judgments are subject to an inherent degree of uncertainty and are based upon our historical experience, known trends in our

industry, terms of existing contracts, other information from outside sources, as appropriate and other factors.

Therefore, management

discusses the development, selection and disclosures with the audit committee.

Among other factors, these judgements are based

upon our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources,

as appropriate.

We believe the critical accounting policies that require the most significant estimates, assumptions and judgments

in the preparation of our financial statements, including the unaudited Condensed Financial Statements contained in this Quarterly

Report on Form 10-Q, include:

revenue recognition and the estimation of variable consideration, inventory valuation, share-based

compensation and warranty reserve.

Impacts of COVID-19

on Our Business and Operations

In March 2020, the World

Health Organization designated COVID-19 as a global pandemic, and the U.S.

Department of Health and Human Services designated COVID-19

as a public health emergency (“PHE”).

In response to the COVID-19 pandemic and the U.S.

federal government’s

declaration of a PHE, the Centers for Medicare & Medicaid Services (“CMS”) implemented a number of temporary rule

changes and waivers to allow prescribers to best treat patients during the period of the PHE.

These waivers became effective on

March 1, 2020.

Clinical indications and documentation typically required will not be enforced for respiratory-related products,

including the SmartVest System (solely with respect to Medicare patients).

The minimum documentation now requires a valid order

and documentation of a respiratory-related diagnosis.

Face-to-face and in-person requirements for respiratory devices are being

waived while the waiver is in place.

On January 30, 2023, the

Biden administration announced that the COVID-19 national and PHE declarations will end on May 11, 2023 (the “PHE End Date”).

Without further action from the U.S.

federal government, we expect the CMS waiver will terminate no later than the PHE End

Date and we may experience a one-time delay in some percentage of our Medicare net revenue as we expect our average Medicare patient

referral to approval timeframe will extend to pre-COVID-19 pandemic timeframes and referrals with diagnoses not covered pre-COVID-19

pandemic may be cancelled or need to be submitted to CMS for an appeal.

We are executing our plans to mitigate the effects on

our net revenue resulting from the likely termination of the CMS waiver by hiring additional employees to increase capacity and

minimize the average timeframe to convert a Medicare patient referral to approval.

of Certain Macro-Economic Conditions and the Supply Chain on Our Business and Operations

observed increased lead times for certain components in our supply chain and increased material costs and shipping rates during

the second half of fiscal 2022 and into the six months ended December 31, 2022.

The changes to our supply chain lead times resulted

in a temporary interruption that impacted product availability for certain customers beginning in September 2022 and continuing

through December 2022.

We anticipate that these increased lead times and temporary interruption of supply have the potential to

continue through the second half of fiscal 2023.

If we are unable to procure components to meet our demand or if we extend delivery

lead-times to our customers, there may be an adverse impact to our revenue and, longer term, the potential of market share losses.

We are taking actions to expedite components and to identify and qualify alternate suppliers for certain components to minimize

any impact to our revenue and customer deliveries.

expect that material costs and shipping rates will remain elevated during the second half of fiscal 2023 relating to supply chain

availability and inflationary trends in electronic components and may extend to other components.

In certain instances, we have

purchased key electronic materials in advance to ensure adequate future supply and mitigate the risk of potential supply chain

It is possible that these macro-economic conditions and the COVID-19 pandemic could have a greater adverse impact

on our supply chain in the future, including impacts associated with preventative and precautionary measures taken by other businesses

and applicable governments.

A reduction or further interruption in any of our manufacturing processes could have a material adverse

effect on our business.

Any significant increases to our raw material or shipping costs could reduce our gross margins.

of Operations

revenues for the three and six months ended December 31, 2022 and 2021 are summarized in the table below.

Three Months Ended December 31,

Six Months Ended

federal government, we expect the CMS waiver will terminate no later than the PHE End Date

and we may experience a one-time delay in some percentage of our Medicare net revenue as we expect our average Medicare patient

referral to approval timeframe will extend to pre-COVID-19 timeframes and referrals with diagnoses not covered pre-COVID-19 may

be cancelled or need to be submitted to CMS for an appeal.

We are executing our plans to attempt to mitigate the potential effects

on our future net revenue resulting from the likely termination of the CMS waiver by hiring additional employees to increase capacity

and minimize the average timeframe to convert a Medicare patient referral to approval and re-educating clinicians on Medicare requirements

for reimbursement of HFCWO.

Impacts of Certain Macro-Economic

Conditions and the Supply Chain on Our Business and Operations

We observed increased lead

times for certain components in our supply chain and increased material costs and shipping rates during the second half of fiscal

2022 and into the nine months ended March 31, 2023.

The changes to our supply chain lead times resulted in a temporary interruption

that impacted product availability for certain customers beginning in September 2022 and continuing through March 2023.

We anticipate

that these increased lead times and temporary interruption of supply have the potential to continue through the fourth quarter

of our fiscal year ending June 30, 2023 (“fiscal 2023”).

If we are unable to procure components to meet our demand

or if we extend delivery lead-times to our customers, there may be an adverse impact to our revenue and, longer term, the potential

of market share losses.

We are taking actions to expedite components and to identify and qualify alternate suppliers for certain

components to minimize any impact to our revenue and customer deliveries.

We expect that material costs and shipping

rates will remain elevated during the fourth quarter of fiscal 2023 and the first half of our fiscal year ending June 30, 2024 relating

to supply chain availability and inflationary trends in electronic components and may extend to other components.

In certain instances,

we have purchased key electronic materials in advance to ensure adequate future supply and mitigate the risk of potential supply chain

It is possible that these macro-economic conditions could have a greater adverse impact on our supply chain in the future,

including impacts associated with preventative and precautionary measures taken by other businesses and applicable governments.

or further interruption in any of our manufacturing processes could have a material adverse effect on our business.

Any significant increases

to our raw material or shipping costs could reduce our gross margins.

Results of Operations

Net revenues for the

three and nine months ended March 31, 2023 and 2022 are summarized in the table below.

Three Months Ended

Increase (Decrease)

3 unchanged sentences

International

care revenue .

Home care revenue increased by $1,328,000, or 14.1%, for the three months ended December 31, 2022

compared to the same period in the prior year.

For the six months ended December 31, 2022, home care revenue was $20,364,000,

representing an increase of $1,676,000, or 9.0%, compared to the same period in the prior year.

The increase was primarily due

to an increase in referrals and approvals.

The increase in referrals was due to an increase in direct sales representatives and

was offset by a temporary interruption in supply chain and associated operations in the six months ended December 31, 2022.

CMS waiver continues to benefit the non-commercial Medicare portion of our home care revenue by increasing the number of referrals

and the approval percentage for non-covered diagnoses.

We believe that our ongoing sales team execution, along with the continued

return to pre-COVID-19 levels of patient face-to-face engagement with physicians and clinic access for our sales team, has the

potential to mitigate much of the impact of a CMS waiver expiration.

care distributor revenue .

Home care distributor revenue decreased by $51,000, or 13.2%, for the three months ended

December 31, 2022 compared to the same period in the prior year.

For the six months ended December 31, 2022, home care distributor

revenue was $890,000, an increase of $347,000, or 63.9%, compared to the same period in the prior year.

Home care revenue .

Home care revenue increased by $1,938,000, or 21.5%, for the three months ended March 31, 2023 compared to the same period in the prior year.

For the nine months ended March 31, 2023, home care revenue was $31,335,000, representing an increase of $3,614,000, or 13.0%, compared to the same period in the prior year.

The increase was primarily due to an increase in referrals and approvals.

The increase in referrals was due to an increase in direct sales representatives as well as positive market momentum from the introduction of our newest generation SmartVest Clearway during the quarter and was partially offset by a temporary interruption in supply chain and associated operations in the nine months ended March 31, 2023.

The CMS waiver continues to benefit the non-commercial Medicare portion of our home care revenue by increasing the number of referrals and the approval percentage for non-covered diagnoses.

We believe that our ongoing sales team execution, along with the continued return to pre-COVID-19 levels of patient face-to-face engagement with physicians and clinic access for our sales team and the recent introduction of our newest generation SmartVest Clearway, has the potential to mitigate much of the impact of the potential CMS waiver expiration.

If we are unsuccessful in mitigating the impact of the CMS waiver expiration, we may experience a decrease in our historical year over year growth rate.

Home care distributor

sales are affected by the timing of distributor purchases that can cause significant fluctuations in reported revenue on a quarterly

The year-to-date revenue increase was due to increased demand from one of our primary home care distribution partners.

Institutional

Institutional revenue was $589,000, an increase of $256,000, or 76.9%, for the three months ended December 31,

Home care distributor revenue decreased by $19,000, or 3.7%, for the three months ended March 31, 2023

compared to the same period in the prior year.

For the six months ended December 31, 2022, institutional revenue was $980,000,

For the nine months ended March 31, 2023, home care distributor revenue was $1,391,000,

an increase of $328,000, or 30.9%, compared to the same period in the prior year.

The increase in the current year periods was

primarily due to increased capital sales to institutional customers.

International

International revenue was $72,000, a decrease of $52,000, or 41.9%, for the three months ended December

31, 2022 compared to the same period in the prior year.

For the six months ended December 31, 2022, international revenue was

$153,000, a decrease of $83,000, or 35.2%, compared to the same period in the prior year.

profit increased to $8,682,000, or 74.0% of net revenues, for the three months ended December 31, 2022, from $7,880,000, or 76.9%

of net revenues, in the same period in the prior year.

Gross profit increased to $17,013,000, or 76.0% of net revenues, for the

six months ended December 31, 2022, from $15,581,000, or 76.9% of net revenues, in the same period in the prior year.

in gross profit as a percentage of net revenues compared to the same period in the prior year was primarily due to increased material

costs and higher shipping expenses to expedite inventory purchases.

general and administrative expenses.

Selling, general and administrative (“SG&A”) expenses were $7,254,000

and $15,243,000 for the three and six months ended December 31, 2022, respectively, representing increases of $779,000 and $1,981,000,

or 12.0% and 14.9%, respectively, compared to the same periods in the prior year.

and compensation-related expenses were $4,940,000 and $9,884,000 for the three and six months ended December 31, 2022, respectively,

representing increases of $614,000 and $1,292,000, or 14.2% and 15.0%, respectively, compared to the same periods in the prior

The increase in the current year periods was primarily due to salaries and incentive compensation related to the higher

average number of sales, sales support, marketing, and reimbursement personnel to process higher patient referrals.

continued to provide regular merit-based increases for our employees and are regularly benchmarking our compensation ranges for

new and existing employees to ensure we can hire and retain the talent needed to drive growth in our business.

Field sales employees

totaled 57 as of December 31, 2022, 48 of which were direct sales representatives, compared to 48 field sales employees and 39

direct sales representatives as of December 31, 2021.

meals and entertainment expenses were $719,000 and $1,632,000 for the three and six months ended December 31, 2022, respectively,

representing increases of $102,000 and $371,000, or 16.5% and 29.4%, respectively, compared to the same periods in the prior year.

The increase in the current year periods was due to a higher average number of direct sales representatives as well as increases

in airfare, lodging and inflationary expenses for our annual sales meeting in August 2022.

discretionary marketing expenses were $182,000 and $369,000 for the three and six months ended December 31, 2022, respectively,

representing a decrease of $29,000 and an increase of $4,000, or a decrease of 13.7% and an increase of 1.1%, respectively, compared

to the same periods in the prior year.

fees were $1,031,000 and $2,462,000 for the three and six months ended December 31, 2022, respectively, representing increases

Home care distributor sales are affected by the

timing of distributor purchases that can cause significant fluctuations in reported revenue on a quarterly basis.

The year-to-date

revenue increase was due to increased demand from one of our primary home care distribution partners.

Institutional revenue.

Institutional revenue was $440,000, an increase of $48,000, or 12.2%, for the three months ended March 31, 2023 compared

to the same period in the prior year.

For the nine months ended March 31, 2023, institutional revenue was $1,420,000, an increase

of $246,000, or 21.0%, compared to the same period in the prior year.

The increase in the current year periods was primarily due

to increased consumable sales to institutional customers.

International revenue .

International revenue was $156,000, a decrease of $40,000, or 20.4%, for the three months ended March 31, 2023 compared to

the same period in the prior year.

For the nine months ended March 31, 2023, international revenue was $309,000, a decrease of

$123,000, or 28.5%, compared to the same period in the prior year.

International sales are affected by the timing of distributor

purchases that can cause significant fluctuations in reported revenue on a quarterly basis.

Gross profit increased to $9,056,000, or 75.0% of net revenues, for the three months ended March 31, 2023, from $7,743,000, or 76.4% of net revenues, in the same period in the prior year.

Gross profit increased to $26,069,000, or 75.7% of net revenues, for the nine months ended March 31, 2023, from $23,324,000, or 76.7% of net revenues, in the same period in the prior year.

The decrease in gross profit as a percentage of net revenues compared to the same period in the prior year was primarily due to increased material costs and component broker fees incurred to accelerate the ramp of supply for the Clearway product.

Operating expenses

Selling, general and

administrative expenses.

Selling, general and administrative (“SG&A”) expenses were $7,694,000 and $22,937,000

for the three and nine months ended March 31, 2023, respectively, representing increases of $1,150,000 and $3,131,000, or 17.6%

and 15.8%, respectively, compared to the same periods in the prior year.

Payroll and compensation-related

expenses were $5,037,000 and $14,920,000 for the three and nine months ended March 31, 2023, respectively, representing increases

of $739,000 and $2,030,000, or 17.2% and 15.7%, respectively, compared to the same periods in the prior year.

Professional fees are

primarily for services related to legal costs, shareowner services and reporting requirements, information technology technical

support and consulting fees.

The increase in the six months ended December 31, 2022 was primarily due to nonrecurring legal compliance

fees of approximately $400,000 for a reimbursement-related project offset by a reduction in expenses related to shareholder activism

incurred during the three months ended September 30, 2021, which concluded with a cooperation agreement that became effective

in September 2021.

and development expenses .

Research and development (“R&D”) expenses were $153,000 and $452,000 for the three

and six months ended December 31, 2022, respectively, representing decreases of $176,000 and $253,000, or 53.5% and 35.9%, respectively,

compared to the same periods in the prior year.

The decrease was primarily due to reduced professional services costs associated

with our next generation Clearway development.

R&D expenses were 1.3% and 2.0% of revenue for the three and six months ended

December 31, 2022, respectively.

interest income for the three and six months ended December 31, 2022 was $7,000 and $11,000, respectively, compared to $6,000

and $15,000, respectively, for the same periods in the prior year.

tax expense was estimated at $304,000 and $271,000, and the effective tax rate was 23.7% and 20.4%, for the three and six months

ended December 31, 2022, respectively.

Estimated income tax expense for the three and six months ended December 31, 2022 includes

a discrete tax expense of $1,000 and a discrete tax benefit of $43,000, respectively, related to the exercise of stock options.

tax expense was estimated at $244,000 and $352,000, and the effective tax rate was 22.6% and 21.6%, for the three and six months

ended December 31, 2021, respectively.

Estimated income tax expense for the three and six months ended December 31, 2021 includes

a discrete tax benefit of $1,000 and $21,000, respectively, related to the exercise of stock options.

income for the three and six months ended December 31, 2022 was $977,000 and $1,058,000, respectively, compared to $838,000 and

$1,277,000 for the same periods in the prior year.

The increase in net income in the three months ended December 31, 2022 was

driven primarily by revenue growth while the decrease in net income in the six months ended December 31, 2022 was primarily due

to increased SG&A expenses related to our sales and reimbursement investments in revenue growth partially offset by increased

gross profit.

and Capital Resources

Flows and Sources of Liquidity

Flows from Operating Activities

six months ended December 31, 2022, net cash used in operating activities was $330,000.

Cash flows provided by operating activities

consisted of net income of $1,058,000, non-cash expenses of $645,000, a decrease in prepaid expenses and other assets of $176,000,

and an increase in income tax payable of $79,000.

These cash flows from operating activities were offset by a decrease in accrued

compensation of $532,000, a decrease in accounts payable and other accrued liabilities of $711,000, an increase in accounts receivable

of $503,000, an increase in inventory of $321,000, and an increase in contract assets of $221,000.

Flows from Investing Activities

the six months ended December 31, 2022, cash used in investing activities was $717,000.

Cash used in investing activities consisted

of $687,000 primarily related to our enterprise resource planning infrastructure investments and $30,000 in expenditures for intangible

Flows from Financing Activities

the six months ended December 31, 2022, cash used in financing activities was $197,000.

Cash used in financing activities consisted

of $153,000 used for our share repurchase program and $60,000 for taxes paid on net share settlement of stock option exercises.

of Capital Resources

primary working capital requirements relate to adding employees to our sales force and support functions, continuing infrastructure

investments, and supporting general corporate needs, including financing equipment purchases and other capital expenditures incurred

in the ordinary course of business.

Based on our current operational performance, we believe our working capital of $28,153,000

and available borrowings under our existing credit facility will provide adequate liquidity during fiscal 2023.

credit facility provides us with a revolving line of credit.

Interest on borrowings on the line of credit accrues at the prime

rate (7.5% at December 31, 2022) less 1.00% and is payable monthly.

There was no outstanding principal balance on the line of

credit as of December 31, 2022 or June 30, 2022.

The amount eligible for borrowing on the line of credit is limited to the lesser

of $2,500,000 or 57.00% of eligible accounts receivable, and the line of credit expires on December 18, 2023, if not renewed.

As of December 31, 2022, the maximum $2,500,000 was available under the line of credit.

Payment obligations under the line of

credit are secured by a security interest in substantially all of our tangible and intangible assets.

documents governing our line of credit contain certain financial and nonfinancial covenants that include a minimum tangible net

worth of not less than $10,125,000 and restrictions on our ability to incur certain additional indebtedness or pay dividends.

failure to comply with these covenants in the future may result in an event of default, which if not cured or waived, could result

in the lender accelerating the maturity of our indebtedness, preventing access to additional funds under the line of credit, requiring

prepayment of outstanding indebtedness, or refusing to renew the line of credit.

If the maturity of the indebtedness is accelerated

or the line of credit is not renewed, sufficient cash resources to satisfy the debt obligations may not be available and we may

not be able to continue operations as planned.

If we are unable to repay such indebtedness, the lender could foreclose on these

the six months ended December 21, 2022 and 2021, we spent $687,000 and $511,000, respectively, on property and equipment.

expect to finance planned equipment purchases with cash flows from operations or borrowings under our credit facility.

need to incur additional debt if we have an unforeseen need for additional capital equipment or if our operating performance does

not generate adequate cash flows.

the impact of the COVID-19 pandemic and other factors such as inflation are difficult to predict, we believe our cash, cash equivalents

and cash flows from operations will be sufficient to meet our working capital, capital expenditure, operational cash requirements for

fiscal 2023 and the foreseeable future.

We will continue to evaluate our projected expenditures relative to our available

cash and evaluate financing alternatives in order to satisfy our working capital and other cash requirements.

Regarding Forward-Looking Statements

contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking

statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section

21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward- looking statements include,

but are not limited to, statements regarding:

The increase in the

current year periods was primarily due to salaries and incentive compensation related to the higher average number of sales, sales

support, marketing, and reimbursement personnel to process higher patient referrals.

We have also continued to provide regular

merit-based increases for our employees and are regularly benchmarking our compensation ranges for new and existing employees to

ensure we can hire and retain the talent needed to drive growth in our business.

Field sales employees totaled 57 as of March 31,

2023, 48 of which were direct sales representatives, compared to 51 field sales employees and 42 direct sales representatives as

of March 31, 2022.

Travel, meals and entertainment

expenses were $658,000 and $2,290,000 for the three and nine months ended March 31, 2023, respectively, representing increases

of $20,000 and $390,000, or 3.1% and 20.5%, respectively, compared to the same periods in the prior year.

The increase in the current

year periods was due to a higher average number of direct sales representatives as well as increases in airfare, lodging and inflationary

expenses for our annual sales meeting in August 2022.

Total discretionary marketing

expenses were $212,000 and $581,000 for the three and nine months ended March 31, 2023, respectively, representing decreases of

$29,000 and $24,000, or 12.0% and 4.0%, respectively, compared to the same periods in the prior year.

Professional fees were

$1,388,000 and $3,850,000 for the three and nine months ended March 31, 2023, respectively, representing increases of $382,000

and $646,000, or 38.0% and 20.2%, respectively, compared to the same periods in the prior year.

Professional fees are primarily

for services related to legal costs, shareowner services and reporting requirements, information technology technical support and

consulting fees.

The increase in the three months ended March 31, 2023 was primarily due to higher legal and consulting costs related

to the termination of the PHE and recruiting costs for multiple senior leadership positions, including a new Chief Executive Officer.

The additional increase in the nine months ended March 31, 2023 was primarily due to nonrecurring legal compliance fees of approximately

$400,000 for a reimbursement-related project offset by a reduction in expenses related to shareholder activism incurred during

the prior year, which concluded with a cooperation agreement that became effective in September 2021.

Research and development

Research and development (“R&D”) expenses were $166,000 and $618,000 for the three and nine months

ended March 31, 2023, respectively, representing decreases of $170,000 and $423,000, or 50.6% and 40.6%, respectively, compared

to the same periods in the prior year.

The decreases in R&D expenses to 1.4% and 1.8% of revenue for the three and nine months

ended March 31, 2023, respectively were due to the completion of the Clearway product development process, resulting in the full

launch to the U.S.

home care market in March 2023.

Interest income, net

Net interest income for the three and nine months ended March 31, 2023 was $26,000 and $37,000, respectively, compared to $6,000 and $21,000, respectively, for the same periods in the prior year.

These increases were due to a higher yield in our interest-bearing cash accounts.

Income tax expense

Income tax expense was estimated

at $147,000 and $418,000, and the effective tax rate was 14.7% and 16.4%, for the three and nine months ended March 31, 2023, respectively.

Estimated income tax expense for the three and nine months ended March 31, 2023 includes a discrete tax benefit of $176,000 and

$219,000, respectively, related to the exercise of stock options.

Income tax expense was estimated

at $224,000 and $576,000, and the effective tax rate was 25.8% and 23.1%, for the three and nine months ended March 31, 2022, respectively.

Estimated income tax expense for the three and nine months ended March 31, 2022 includes a discrete tax benefit of $22,000 and

$43,000, respectively, related to the exercise of stock options and other items.

Net income for the three and nine

months ended March 31, 2023 was $1,075,000 and $2,133,000, respectively, compared to $645,000 and $1,922,000 for the same periods in

the prior year.

The increases in net income were driven primarily by revenue growth and a decrease in R&Dexpenses but partially

offset by increased SG&A expenses related to our sales and reimbursement investments to drive revenue growth as well as

increased material costs and broker fees incurred to ramp up supply for the Clearway product.

Liquidity and Capital Resources

Cash Flows and Sources of Liquidity

Cash Flows from Operating Activities

For the nine months ended

March 31, 2023, net cash provided by operating activities was $316,000.

Cash flows provided by operating activities consisted of

net income of $2,133,000, non-cash expenses of $960,000, and a decrease in prepaid expenses and other assets of $105,000.

cash flows from operating activities were offset by an increase in accounts receivable of $1,293,000, a decrease in accrued compensation

of $660,000, an increase in income tax receivable of $270,000, an increase in inventory of $264,000, an increase in contract assets

of $284,000, and a decrease in accounts payable and other accrued liabilities of $111,000.

Cash Flows from Investing Activities

For the nine months

ended March 31, 2023, cash used in investing activities was $1,275,000.

Cash used in investing activities consisted of $1,221,000

primarily related to our enterprise resource planning infrastructure investments and $54,000 in expenditures for intangible asset

Cash Flows from Financing Activities

For the nine months ended

March 31, 2023, cash used in financing activities was $418,000.

Cash used in financing activities consisted primarily of $305,000

for taxes paid on net share settlement of stock option exercises and $153,000 used for our share repurchase program partially offset

by cash received for stock option exercises.

Adequacy of Capital Resources

Our primary working capital

requirements relate to adding employees to our sales force and support functions, continuing infrastructure investments, and supporting

general corporate needs, including financing equipment purchases and other capital expenditures incurred in the ordinary course

Based on our current operational performance, we believe our working capital of $28,752,000 and available borrowings

under our existing credit facility will provide adequate liquidity during fiscal 2023.

Our credit facility provides

us with a revolving line of credit.

Interest on borrowings on the line of credit accrues at the prime rate (8.0% at March 31, 2023)

less 1.00% and is payable monthly.

There was no outstanding principal balance on the line of credit as of March 31, 2023 or June

The amount eligible for borrowing on the line of credit is limited to the lesser of $2,500,000 or 57.00% of eligible

accounts receivable, and the line of credit expires on December 18, 2023, if not renewed.

As of March 31, 2023, the maximum $2,500,000

was available under the line of credit.

Payment obligations under the line of credit are secured by a security interest in substantially

all of our tangible and intangible assets.

The documents governing

our line of credit contain certain financial and nonfinancial covenants that include a minimum tangible net worth of not less than

$10,125,000 and restrictions on our ability to incur certain additional indebtedness or pay dividends.

Any failure to comply with

these covenants in the future may result in an event of default, which if not cured or waived, could result in the lender accelerating

the maturity of our indebtedness, preventing access to additional funds under the line of credit, requiring prepayment of outstanding

indebtedness, or refusing to renew the line of credit.

If the maturity of the indebtedness is accelerated or the line of credit

is not renewed, sufficient cash resources to satisfy the debt obligations may not be available and we may not be able to continue

operations as planned.

If we are unable to repay such indebtedness, the lender could foreclose on these assets.

For the nine months ended March

31, 2023 and 2022, we spent $1,221,000 and $980,000, respectively, on property and equipment.

We currently expect to finance planned

equipment purchases with cash flows from operations or borrowings under our credit facility.

We may need to incur additional debt

if we have an unforeseen need for additional capital equipment or if our operating performance does not generate adequate cash

While the impact of macro-economic

factors such as inflation are difficult to predict, we believe our cash, cash equivalents and cash flows from operations will be

sufficient to meet our working capital, capital expenditure, operational cash requirements for fiscal 2023 and the foreseeable

We will continue to evaluate our projected expenditures relative to our available cash and evaluate financing alternatives

in order to satisfy our working capital and other cash requirements.

Information Regarding Forward-Looking Statements

Statements contained in

this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within

the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities

Exchange Act of 1934, as amended (the “Exchange Act”).

Forward- looking statements include, but are not limited to,

statements regarding:

the expected impact of the COVID-19 pandemic on our business;

our business strategy,

including our intended level of investment in R&D and marketing activities;

our expectations with respect to earnings, gross

margins and sales growth, industry relationships, marketing strategies and international sales;

estimated sizes of markets into

which our products are or may be sold;

our business strategy, including our intended

level of investment in R&D and marketing activities;

our expectations with respect to earnings, gross margins and sales growth,

industry relationships, marketing strategies and international sales;

estimated sizes of markets into which our products are or

our business strengths and competitive advantages;

our ability to grow additional sales

distribution channels;

our intent to retain any earnings for use in operations rather than paying dividends;

our expectation that

our products will continue to qualify for reimbursement and payment under government and private insurance programs;

our intellectual

property plans and practices;

our ability to grow additional sales distribution channels;

intent to retain any earnings for use in operations rather than paying dividends;

our expectation that our products will continue

to qualify for reimbursement and payment under government and private insurance programs;

our intellectual property plans and practices;

the expected impact of applicable regulations on our business;

our beliefs about our manufacturing

our expectations and beliefs with respect to our employees and our relationships with them;

our belief that our current

facilities are adequate to support our growth plans;

our expectations with respect to ongoing compliance with the terms of our

credit facility;

our expectations regarding the ongoing availability of credit and our ability to renew our line of credit;

to our products and services;

our beliefs about our manufacturing processes;

our expectations

and beliefs with respect to our employees and our relationships with them;

our belief that our current facilities are adequate

to support our growth plans;

our expectations with respect to ongoing compliance with the terms of our credit facility;

our expectations

regarding the ongoing availability of credit and our ability to renew our line of credit;

enhancements to our products and services;

expected excise tax exemption for the SmartVest System;

and our anticipated revenues, expenses,

capital requirements and liquidity.

Words such as “anticipate,” “believe,” “continue,” “could,”

“estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,”

“potential,” “project,” “goal,” “target,” “should,” “will,”

“would,” and similar expressions, including the negative of these terms, are intended to identify forward-looking

statements but are not the exclusive means of identifying such statements.

Although we believe these forward-looking statements

are reasonable, they involve risks and uncertainties that may cause actual results to differ materially from those projected by

and our anticipated revenues, expenses, capital requirements and liquidity.

Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,”

“expect,” “intend,” “may,” “ongoing,” “plan,” “potential,”

“project,” “goal,” “target,” “should,” “will,” “would,”

and similar expressions, including the negative of these terms, are intended to identify forward-looking statements but are not

the exclusive means of identifying such statements.

Although we believe these forward-looking statements are reasonable, they involve

risks and uncertainties that may cause actual results to differ materially from those projected by such statements.

Such statements

Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results

or our industry’s actual results, levels of activity, performance or achievements to be materially different from the information

expressed or implied by the forward-looking statements.

that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited

to, the following:

to obtain reimbursement from Medicare, Medicaid, or private insurance payers for our

products including potential adverse impact with an expiration of the CMS waiver for

certain respiratory diseases;

or raw material shortages, changes to lead times or significant price increases;

risks associated with our anticipated launch of Clearway;

changes to state and federal health care regulations;

ability to maintain regulatory compliance and to gain future regulatory approvals and

of new competitors including new drug or pharmaceutical discoveries;

economic and business conditions or intense competition;

risks associated with our planned sales force expansion;

and component price inflation;

problems with our research and products;

duration, extent and severity of the COVID-19 pandemic, including its effects on our

business, operations and employees as well as its impact on our customers and distribution

channels and on economies and markets more generally;

risks associated with cyberattacks, data breaches, computer viruses and other similar

security threats;

affecting the medical device industry;

ability to develop new sales channels for our products such as the home care distributor

international health care regulation impacting current international business;

ability to renew our line of credit or obtain additional credit as necessary;

ability to protect and expand our intellectual property portfolio.

list of factors is not exhaustive, however, and these or other factors, many of which are outside of our control, could have a

material adverse effect on us and our results of operations.

Therefore, you should consider these risk factors with caution and

form your own critical and independent conclusions about the likely effect of these risk factors on our future performance.

Forward-looking

statements speak only as of the date on which the statements are made, and we undertake no obligation, and expressly disclaim

any such obligation, to update any forward-looking statement for any reason other than as required by law, even if new information

becomes available or other events occur in the future.

You should carefully review the disclosures and the risk factors described

in this and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), including

our Annual Report on Form 10-K for fiscal 2022.

All forward-looking statements attributable to us or persons acting on our behalf

are expressly qualified in their entirety by the cautionary statements set forth herein.

and Qualitative Disclosures About Market Risk.

a smaller reporting company, we are not required to provide disclosure pursuant to this Item.

involve known and unknown risks, uncertainties and other factors that may cause our actual results or our industry’s actual

results, levels of activity, performance or achievements to be materially different from the information expressed or implied by

the forward-looking statements.

Factors that could cause

actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the following:

● ability to obtain reimbursement from Medicare, Medicaid, or private insurance

payers for our products including the potential adverse impact of an expiration of the CMS waiver for certain respiratory diseases;

● component or raw material shortages, changes to lead times or significant

price increases;

● business disruption from the anticipated implementation of a new enterprise

resource planning software system;

● adverse changes to state and federal health care regulations;

● our ability to maintain regulatory compliance and to gain future regulatory

approvals and clearances;

● entry of new competitors including new drug or pharmaceutical discoveries;

● adverse economic and business conditions or intense competition;

● the risks associated with our planned

sales force expansion;

● wage and component price inflation;

● technical problems with our research and products;

● the duration, extent and severity of the COVID-19 pandemic, including its

effects on our business, operations and employees as well as its impact on our customers and distribution channels and on economies

and markets more generally;

● the risks associated with cyberattacks, data breaches, computer viruses

and other similar security threats;

● changes affecting the medical device industry;

● our ability to develop new sales channels

for our products such as the home care distributor channel;

● adverse international health care regulation impacting current international

● our ability to renew our line of credit

or obtain additional credit as necessary;

● our ability to protect and expand our intellectual property portfolio.

This list of factors is

not exhaustive, however, and these or other factors, many of which are outside of our control, could have a material adverse effect

on us and our results of operations.

Therefore, you should consider these risk factors with caution and form your own critical

and independent conclusions about the likely effect of these risk factors on our future performance.

Forward-looking statements

speak only as of the date on which the statements are made, and we undertake no obligation, and expressly disclaim any such obligation,

to update any forward-looking statement for any reason other than as required by law, even if new information becomes available

or other events occur in the future.

You should carefully review the disclosures and the risk factors described in this and other

documents we file from time to time with the Securities and Exchange Commission (the “SEC”), including our Annual Report

on Form 10-K for fiscal 2022.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified

in their entirety by the cautionary statements set forth herein.

Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required

to provide disclosure pursuant to this Item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis